Monday, January 21, 2013

Today's links

1---Low money multiplier does not justify ultra easy monetary policy, sober look

What many economists failed to realize - and many continue to do so today - was that the risk of excessive liquidity is not necessarily the overall price inflation. With US wages stagnant, those looking for a 70s-style inflation will not find it. Instead liquidity manifests itself in asset bubbles, which is exactly what was happening in the housing market at the time when the money multiplier was at the lowest levels in recent history (chart above). Plus in a global economy, inflation (including wage inflation) was simply exported to emerging markets nations.

Economists and market participants however find ways of rationalizing asset bubbles - just as they did with the housing market in the US and China's double digit growth (among other bubbles) during the first half of last decade. That's why using the traditional money multiplier as a rationale for an ultra loose monetary policy is not prudent.

As an example of where this excess liquidity may be ending up today, consider the fact that the average US corporate junk bond yield ended up at an all-time low of 5.93 last week (chart below). Of course market participants have dozens of ways of rationalizing this trend - just as they did with other markets many times before.

Therefore before dismissing the expansion in the US monetary base as inconsequential, consider the fact that in spite of low money multiplier, excess liquidity will find ways to distort markets right under our noses. And you don't need to generate headline inflation in order for these distortions to damage the economy when the correction finally takes place.

2---Fed's balance sheet grows above $3 trillion, finally impacting the monetary base, sober look

3---Mohamed El-Erian's 'New Normal' Is Ending—America's Watershed Moment Is Near, business insider

Markowska says the reason is because even despite the weakness that will be revealed in the Q4 GDP report, the first quarter of 2013 should be much better:
However, if our beancounting is correct, it implies much more ‘juice’ in Q1. Ironically, despite the fiscal drag from higher tax rates, Q1 GDP may print in high 2s or perhaps even as high as 3%. That’s because the lifts from business investment, housing, inventories and trade may more than offset the expected hit to consumption from higher tax rates.
It also appears that real consumer spending ended the year on a strong note with real PCE rising up 0.3% m/m in December. This would put the December level 1.5% annualized above the Q4 average. This positive momentum will also help absorb some of the fiscal drag.
All of this coincides with increasing evidence that the U.S. is escaping from the "liquidity trap" that has made monetary policy so ineffective in the crisis era.

4---Neo-liberal economists and politicians....repeatedly force nations back into recession or even depression, Bill Black, Huffington Post

The paragraph is critical to understanding the context of the creation of the Washington Consensus. It was all about the Latin American "debt crisis." It was all about a quid pro quo. The Washington Consensus was a consensus of creditors about how to deal with their debtors. Latin American debtor nations would be allowed to delay the repayment of their debts, but only if they "submit[ed]" to "strong conditionality" dictated by the Washington creditors. The creditors -- the U.S. Treasury, the Federal Reserve, the IMF, and the largest U.S. banks -- needed to develop a coordinated position on what to demand as their quid pro quo from the Latin American debtors. The number one thing on their list from the beginning was austerity ("setting their houses in order"). ...

The Washington Creditors' succeeded in getting most of Latin America to "submit" to austerity, deregulation, and privatization. The resultant scandals enraged tens of millions of Latin Americans and led to the election of many national leaders running on the promise to refuse to "submit" to the Washington Consensus.

Neo-liberal economists and politicians, however, are prisoners of their pro-austerity dogmas. They repeatedly force nations back into recession or even depression. It does not matter how many times austerity makes the crisis worsen; the austerians are a one-trick pony. I believe that within five years we will see a series of political leaders elected in Europe on anti-austerity planks. The Washington Creditors' Consensus is a leading cause of financial crises and human misery because of it self-destructive austerity and anti-regulatory principles. Austerity is the leading cause of the election of national leaders who promise that if elected they will stop "submitting" to creditors' demands that they inflict austerity on their people.

5---Delinquent jumbo loans in Coastal California pollute bank balance sheets, oc housing

During the bubble, the GSEs lost market share to private lenders, but since the bubble burst, the GSEs and the FHA have insured 95% or more of the loans in the market. In addition, they have been the dumping grounds for banks as they picked up liability for many of their bad loans through the numerous failed loan modification programs run by the government. As a result, many bad mortgages under the conforming loan limit came under the control of the GSEs, and they have not allowed delinquent borrowers to squat. The delinquency rate at the FHA is very high, but then again, they have been issuing 3.5% down loans in a declining market. The GSEs and FHA try to modify loans, but when the modifications fail, they push the properties through foreclosure.
So where does that leave the bad loans? On bank balance sheets concentrated in affluent areas dominated by jumbo loans — think Coastal California....

It’s obvious to everyone that loan modification programs are not the answer. The first of these programs failed more than 75% of the time. The recent mortality rate in loan modifications runs at about 50% per year. 14% don’t even survive the initial three-month trial period. Loan modifications are a portrait in failure.
As a result of failed loan modifications and a slow foreclosure rate, delinquency rates have remained about 10% at the major banks since 2009. They are making almost no progress toward solving their delinquency problems.

6---Is a New Bull Market Here?, Barrons

7---Number of the Week: Don’t Expect Too Big a Housing Boost, WSJ

2.5%: Residential fixed investment’s share of GDP in the third quarter of 2012.
An unexpectedly strong jump in December housing starts put a nice coda onto housing’s upward run in 2012.
But while the latest numbers on starts–as well as sales and prices–suggest housing is firmly in recovery with more gains to come, the news doesn’t herald a sudden jump in overall economic activity. Especially not with consumers

The December 12.1% increase in starts to a more than four-year high of 954,000 may say more about the weather than the strength in the housing sector. December was one of the 10th warmest on record, according to the U.S. National Oceanic and Atmospheric Administration.
What was more encouraging for the outlook was the uptrend in building permits. Even with the burst in starts at the end of 2012, the number of homes authorized but not yet started in December was 19.5% above the level of December 2011. Pent-up orders will lift homebuilding this year.
The problem is that the homebuilding sector isn’t a large enough share of gross domestic product to move the growth needle. Even if residential construction, less than 3% of GDP, jumps 20% this year, the gain would add only between one-quarter to one-third percentage point to GDP growth.
Such a contribution wouldn’t even be big enough to offset the drag coming from higher taxes. Economists at Goldman Sachs forecast the $200 billion in tax increases related to the “fiscal cliff” deal will reduce annualized growth in consumer spending by one percentage point in the first half of 2013.
The impact from smaller paychecks was evident in Friday’s report on consumer sentiment for early January.
The sentiment index unexpectedly fell to a 13-month low of 71.3. And economists worry households could turn moodier, which risks a bigger slowdown in consumer spending.
“With the debt ceiling yet to be tackled and more political acrimony on the way, we suspect that confidence has room to deteriorate further,” said economists at Jefferies

8---Obama to approve drone assassination manual, wsws
President Obama is about to sign off on a manual that will institutionalize the process by which the White House orders and approves killings by remote-controlled drones, according to a report Sunday.

The so-called counterterrorism “playbook” will define the circumstances under which the CIA and the military’s Special Forces Command, the two agencies that operate drones in Afghanistan, Pakistan, Yemen, Somalia and other parts of the Middle East and Africa, may use lethal force.

The front-page article in the Washington Post amounts to a semi-official announcement by the White House and is based on statements by unnamed government officials. Its publication, on the same day that Obama officially took the oath of office for his second term as president, demonstrates the role of his administration as an instrument of the military-intelligence apparatus.

The US government is so deeply engaged in assassinations all over the world that top officials believe a manual is required to regularize the process....

According to the report, “Among the subjects covered in the playbook are the process for adding names to kill lists, the legal principles that govern when US citizens can be targeted overseas and the sequence of approvals required when the CIA or US military conducts drone strikes outside war zones.”
The Obama administration has refused to disclose what “legal principles” supposedly give the president the power of life and death over all humanity.

9---The Fed IS the housing market, Dr Housing Bubble

According to the above barometer, a normal market would have 1.5 million construction starts. We are at 861k. We’re making progress here but still a good distance from 1.5 million. The next item is existing home sales. We’re at 5.04 million whereas a more normal market would be at 5.5 million. On this metric we are inching closer to a more normal market. The number of mortgages in some sort of distress is up to 10.63 percent. This is still very high compared to the normal rate of 5.25 percent....

Prior to the recession, the Fed balance sheet was well under $1 trillion. We are a very long way from that and the Fed with QE3 is basically eating up MBS from the market. It is interesting that some would like to discount this activity yet the Fed is dictating interest rates and is the major player in the mortgage market. In other words, the Fed is the housing market....

The last few years have seen a large amount of buying come from investors. Nearly one third of all sales were investor based. This is incredibly high. It is hard to find historical data on a normal figure here but I would venture to guess that it is around the 10 percent range for the nation. In California, foreign demand makes up this portion alone:
“(OC Register) The National Association of Realtors estimated that foreign buyers accounted for 11 percent of California home sales.
The California Association of Realtors, however, pegged foreign sales at 5.8 percent of the state’s transactions. Of those, 39 percent of the buyers come from China, followed by buyers from Canada (13 percent), and from India and Mexico (8.7 percent each), CAR reported.”
Last month over 33 percent of buyers in Southern California paid all cash for their purchases, tying a previous historical record set a few months ago. The monthly average since 2000 is closer to 17 percent so we are nearly double that.

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